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States provide health care coverage to about 60 million low-income uninsured adults and children largely through two federal-state programs--Medicaid and the State Children's Health Insurance Program (SCHIP). Medicaid, established in title XIX of the Social Security Act, generally covers low-income families and elderly and disabled individuals, and SCHIP, established in title XXI of the act, covers children in families whose incomes, although low, are above Medicaid's eligibility requirements. In 2001, the Secretary of Health and Human Services announced a new initiative--the Health Insurance Flexibility and Accountability Initiative (HIFA)--under which states could expand coverage to uninsured populations using Medicaid and SCHIP funds. HIFA encourages states to develop coordinated public and private health insurance coverage options and to target program resources to uninsured individuals with incomes below 200 percent of the federal poverty level (FPL). Authority for this initiative comes from section 1115 of the Social Security Act, which allows the Secretary to waive many of the statutory requirements of Medicaid or SCHIP in the case of experimental, pilot, or demonstration projects that promote program objectives. Within the Department of Health and Human Services (HHS), the Centers for Medicare & Medicaid Services (CMS) has the lead role in reviewing HIFA waiver applications. In a July 2002 report, we raised legal and policy concerns about the need to clearly establish purposes and populations for which SCHIP funds may be spent. Our specific concerns related to HHS's approval of a HIFA waiver for Arizona, which proposed using unspent SCHIP funds to cover childless adults. We reported that, in our view, approving a waiver to use SCHIP funds for expanding coverage to childless adults was inconsistent with SCHIP's statutory objective to expand health coverage to low-income children. Because the SCHIP statute requires that unused funds be redistributed to states that have spent their allotments, states' coverage of childless adults using SCHIP funds decreases the funding available in future years for reallocation to states with unmet SCHIP needs. We also reported that HHS had approved HIFA waivers for Arizona and California to use SCHIP funds to cover parents of SCHIP- and Medicaid-eligible children without regard to cost-effectiveness, even though the SCHIP statute provides that families may be covered only if such coverage is cost-effective--that is, only if covering the family costs no more than covering the eligible children. We suggested that Congress consider specifying in statute that SCHIP funds are not available to cover childless adults and recommended that HHS deny any pending or future state proposals to spend SCHIP funds for such coverage. We also suggested that Congress consider establishing which statutory objectives should take precedence: those of the SCHIP statute, which authorizes family coverage only if cost-effective, or those of section 1115, which allows certain statutory provisions--such as cost-effectiveness tests--to be set aside. Congress requested that we update our analysis of states' HIFA waiver proposals and approved by HHS after July 2002.

Despite SCHIP's statutory objective of expanding coverage to low-income children, HHS has continued to approve HIFA waivers that allow states to use SCHIP funds to cover childless adults. From July 2002 through December 2003, HHS approved three states' proposals to use SCHIP funds for childless adults. Without requiring the states to meet the statutory cost-effectiveness test, the agency also approved four states' proposals to use SCHIP funds to cover parents or guardians of SCHIP- or Medicaid-eligible children. Unless Congress and HHS take actions in response to the matters for congressional consideration and recommendations to HHS presented in our July 2002 report, it appears likely that HHS will continue to allow states to use SCHIP funds for childless adults, and for parents and guardians, without regard to whether this use is cost-effective. HHS reviewed a draft of this report and reiterated its position responding to our July 2002 report. HHS continues to believe that using section 1115 waiver authority to approve spending SCHIP funds to cover childless adults is appropriate because this practice helps low-income Americans who do not have health insurance. We believe that in allowing states to use unspent SCHIP funds for their own adult populations, HHS is reducing the unspent SCHIP funds available for future redistribution to states that have exhausted their allotments for covering uninsured low-income children. HHS has not, in our view, adequately explained how the objectives of the SCHIP statute are promoted by insuring childless adults or by covering populations besides children without regard to cost-effectiveness.